The Biden administration has enacted a major new policy that could dramatically impact the lives of millions of gig workers across the country. The new rules from the Department of Labor seek to provide additional protections and benefits to independent contractors by making it more difficult for companies to classify workers as contractors rather than employees.
Key Details of New Independent Contractor Rule
| Old Rule | New Rule | |
|---|---|---|
| Definition of Employee | Used an ambiguous “economic realities test” with multiple factors to determine employee status | Establishes clearer criteria focused on the nature of a worker’s job to assess whether they should be an employee |
| Employee Benefits | Companies not required to provide benefits like minimum wage, overtime pay, unemployment insurance, etc. to contractors | Workers meeting the new employee criteria must be provided these benefits by their employer |
| Business Flexibility | Companies had broad discretion to use independent contractors for cost savings and flexibility | New test limits when contractors can be used, reducing flexibility in some business models |
| Impact | Primarily affected temp agencies, janitorial and staffing companies, etc. using 1099 workers | Likely to disrupt tech companies like Uber, Lyft, DoorDash and more using gig workers |
Rule Seeks to Turn Many Gig Workers Into Employees
The 528-page rule establishes a new test to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act. Rather than relying on a subjective evaluation across multiple factors, the updated standard introduces clearer criteria focused on the nature of a worker’s job. Workers providing a service central to a company’s business who do not have control over key aspects of their job may now more likely be classified as employees in most cases.
This change could have seismic implications for companies at the forefront of the gig economy like Uber, Lyft, Instacart, and DoorDash. These platforms have built massive businesses treating drivers, shoppers, and delivery couriers as independent contractors, avoiding costs associated with employees. Under the new guidance, many of these workers would likely need to be reclassified as employees if the core service they provide is integral to the company’s central operations.
Uber CEO Dara Khosrowshahi blasted the rule change, claiming it will “undermine the flexibility drivers value most” while increasing costs. But labor advocates counter that the misclassification of employees as contractors denies basic worker protections and allows tech giants to skirt labor laws for cost savings.
Sweeping New Benefits and Protections Now Expected
By qualifying as employees under federal law, gig workers impacted by the policy shift may now be entitled to a host of new benefits and protections including:
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Minimum wage and overtime pay – Employees must be compensated at least the federal or state minimum wage for all hours worked, along with overtime premiums for work over 40 hours per week. Contractors have no such protections.
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Unemployment insurance – Employees who lose their job through no fault of their own may qualify for unemployment benefits from the state. Self-employed gig workers currently do not.
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Workers compensation – If an employee gets injured on the job, state-administered workers compensation programs cover their health care costs and partial wage replacement. For contractors, no such programs exist.
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Anti-discrimination protections – Various federal and state laws prohibit employee discrimination and harassment based on protected characteristics. Those requirements are far more ambiguous with contractors.
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Collective bargaining rights – The National Labor Relations Act grants employees (but not contractors) rights to organize, unionize, and engage in collective action.
These new rights, if exercised, would substantially increase costs for companies built upon contractor labor like Uber and Lyft – likely by hundreds of millions or billions of dollars annually.
Years-Long Battle Over Contractor Classification
Debate has raged for nearly a decade over the appropriate legal status of gig workers. When pioneering companies like Uber, Lyft, and DoorDash began building large workforces of drivers and couriers classified as independent contractors, they opened a rift with regulators and labor groups who argued those roles clearly constituted employment.
In the intervening years, intensifying legal and political battles have led to worker organizing, high-profile court cases, localized regulatory crackdowns, and repeated calls for state and federal action.
The new Biden administration rule marks the most aggressive step yet from Washington to insert broader oversight and compliance requirements into the gig economy’s labor practices. It follows on the heels of a 2018 California Supreme Court ruling and 2019 state law (AB5) similarly embracing a stricter test for classifying employees vs contractors.
What Happens Next: Court Battles and Business Disruption
Legal challenges and months of further administrative review mean the new federal guidance will not take effect immediately. But whenever implementation moves forward, it promises to set off aftershocks across multiple fronts.
Several high-profile court battles remain unresolved over worker classification in the gig economy, including suits brought by Uber and Lyft drivers against the companies. The new Labor Department position could influence the trajectory of those cases. State and municipal regulatory bodies may also feel emboldened to accelerate enforcement actions against companies deemed non-compliant with employment laws.
On the business side, some companies may choose to shift portions of their workforce onto employer roles rather than risk penalties for misclassification. Others may explore different service models to utilize contract workers only in areas deemed peripheral to core operations, reducing flexibility. Legal, operations and business model changes could all drive up costs – which some predict may get passed through to consumers in the form of higher prices.
Meanwhile, with collective bargaining rights potentially in sight, gig worker organizing and unionization campaigns seem poised to gain momentum.
Final Rule Culmination of Years-Long Effort
The formal publication of the 530-page rule on Tuesday marks the conclusion of a process that began in 2021 as the Biden administration commenced a top-to-bottom review of worker classification. A proposed version was unveiled in October 2022, opening a 45 day public comment period that yielded over 300 stakeholder submissions from industry groups, labor advocates, regulators and elected officials.
Tuesday’s final document incorporates a handful revisions made in response to that feedback, but leaves the core worker classification framework largely intact. With the rule now cleared through the Office of Management and Budget, the last remaining step is official transmission to the Federal Register for formal publication.
Once live, the policy could trigger transformative changes across multiple industries over months and years. But legal obstacles and countervailing business interests fed up with mounting regulation promise to fuel continued clashes as the battle stretches on over the future of work in America.
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